Kathy is a senior business trial attorney with more than 25 years experience prosecuting and defending claims for clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases on under standard fee and alternative fee arrangements. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring an expert on fraud or Ponzi schemes.

Monday, December 31, 2012

December 2012 Ponzi Scheme Roundup

Posted by Kathy Bazoian Phelps

The last month of 2012 finished the year with a continued high volume of Ponzi scheme news. Here is the summary of the stories that were reported this month. Please feel free to post comments about these or other Ponzi schemes that I may have missed. And please remember that I am just relaying what’s in the news, not writing or verifying it.

Eric Aronson, 43, had previously been indicted with two other men as part of an alleged $26 million Ponzi scheme but had been out on bail until he just surrendered to new charges. The first charges alleged that Aronson promised investors up to 400 percent interest in a business that imported paving stones from Australia. Aronson was also charged with defrauding a California man out of $25,000 by falsely claiming he could market the businessman’s health food bars on the “Dr. Oz” television show. Aronson was sentenced to 40 months prison in 2000 for securities fraud.

Noah Aulwes, 56, has been sentenced to 10 years in prison in connection with his Ponzi scheme which defrauded 36 investors. Aulwes pleaded guilty in August to securities fraud, money laundering and first-degree theft. He misappropriated about $200,000 of investors’ funds for his personal benefit and to make “Ponzi-type” payments to other investors. He misappropriated about $90,000 of investors’ funds invested in the Philippines.

Jason “Bo” Beckman, 42, filed a sentencing memorandum trying to avoid a lengthy sentencing for his role in a $195 million Ponzi scheme run by Trevor Cook. Beckman offered to deliver a $19 million check to the scheme’s victims, provided that he only receives a one-year prison sentence. The Ponzi scheme is believed to be the second largest financial fraud in Minnesota history. It involved promises of above-average returns because one of Cook’s companies, Crow Fores, could supposedly take out interest-free loans by virtue of its Jordanian operators’ adherence to Islamic sharia law that forbade charging interest. The scheme targeted about 700 investors. Two of Cook’s co-conspirators used their influence as Christian radio talk show hosts to pitch the investment, while Beckman used his position as a money manager to recruit investors. Cook was previously sentenced to 25 years in prison.

Stephen Blankenship, 64, of Connecticut, known as “Danbury’s Bernie Madoff,” was sentenced to 41 months in prison and ordered to pay restitution in connection with a Ponzi scheme that defrauded about a dozen victims of more than $500,000. The court rejected Blankenship’s assertion that he was too sick for prison. Blankenship had solicited customers to invest in his company, Deer Hill Financial Group, LLC, promising them high rate of return. In order to create the appearance of legitimacy, Blankenship sent investors fraudulent account statements reflecting fictitious holdings, fictitious transactions, fictitious prices for the securities, and phony balances, all of which were intended to convince investors that their money was secure and appreciating.

Jack E. Brown, a tax preparer accused of running a large Ponzi scheme, is refusing to answer questions by his bankruptcy trustee. Brown is accused of running a scheme that promised returns as high as 15 percent and of never actually investing the $10 million that he took in.

Ray Thomas Brown was charged by the CFTC with operating two commodity schemes which defrauded investors of about $1.2 million. It is alleged that Brown fraudulently solicited members of the public to participate in a commodity pool while acting as an unregistered commodity pool operator, and that Brown fraudulently duped persons to authorize him to trade their commodity futures accounts. Brown’s fraud allegedly included misrepresentations and omissions about his past trading success, trading profits, trading expertise and personal history, the dissemination of false account statements, and the misappropriation of customer funds.

Anthony D’Agonstino, 77, was indicted in connection with allegations that he ran a Ponzi scheme through his company, Commercial Mortgage and Finance. The scheme may have involved about 1,400 investors and about $20 million.

Benjamin Daniels of California, Dominic O’Dierno of Oregon, and Stephen Persad of Oregon were charged by the SEC with failing to register as broker-dealers before engaging in securities transactions. The SEC’s investigation found that the three were serving as primary points of contact between investors and a hedge fund manager named Yusaf Jawed, who has been charged with running a $37 million Ponzi scheme. They have not been charged, however, with having knowledge of the fraud.

Brian Ray Dinning was charged in connection with a $2 million Ponzi scheme, which involved purported investments in South African gold and diamond mines. Dinning’s bond request was denied when the court found that Dinning had a history and character that showed a pattern of running from problems.

Alex Dowlatshahi, Christopher Mills, and Robert Wilson had final judgments entered against them in favor of the SEC in connection with a Ponzi scheme that benefitted themselves, David Ronald Allen and other companies including China Voice Holding Corp. The judgments permanently enjoin Dowlatshahi and Mills from further securities violations. Dowlatshahi and his companies, Lucrative Enterprises Corp., Synergetic Solutions LLC, Integrity Driven Network Corp., Darius Assets Holding Corp., are ordered to pay disgorgement and prejudgment interest. Mills and his companies, Sleeping Bear LLC and Silver Summit Holdings LLC, are ordered to pay disgorgement and prejudgment interest. Wilson and his companies, Strategic Capital and Green Horseshoe Holdings, Inc., are ordered to pay disgorgement and prejudgment interest.

James William Downing, 49, was sentenced to 15 years in prison in connection with his Ponzi scheme that he ran through Health Solutions for Life. Downing defrauded investors of $340,000.

Eliott Jay Dresher, 66, was sentenced to 6½ years in prison and ordered to pay $8.8 million in restitution for his scheme that defrauded about 26 victims out of $13.5 million by falsely promising that he was using their money to finance a business that distributed NASCAR merchandise to retailers such as Costco and Ross. Dresher guaranteed substantial monthly returns between 20 and 25 percent every six months.

Timothy Durham filed an appeal of his conviction for which he was sentenced 50 years for stealing $200 million from investors in Fair Finance.

Brian D. Fox, the former chief executive of Powder River Petroleum International Inc., has been ordered to pay nearly $500,000 in fines and forfeitures in connection with charges by the SEC that he ran a Ponzi scheme.

Ian Campbell Gent, 70, was sentenced to 8 years in prison after being convicted on charges relating to a $6 million Ponzi scheme that defrauded 94 investors. Gent was working for Guy Gane in soliciting funds to invest in waterfront real estate through Watermark M-One Financial Services. Gane promised investors 10 percent returns, but no investments were made.

John Robert Graves, 53, of Virginia, and his wife, Sara Turberville Graves, 45, pleaded guilty to a scheme that defrauded 11 investors out of $1.3 million. John Graves had resigned from the FBI in 1999 and founded Brooke Point Management in 2003, through which he sold insurance and offered financial advice and investments. He was also a registered investment advisor with and SEO of Compas Financial Advisers. The Graves targeted elderly investors. John Graves received an 11 year 3 month sentence and Sara Graves received a 3 year sentence.

Wendell and Allen Jacobson were ordered to forfeit millions of dollars of profits from the operation a Ponzi scheme through Management Solutions Inc. The scheme involved about 200 investors who had invested more than $200 million. The receiver of Management Solutions and the defrauded investors continue to disagree on the best method of liquidation and distribution of the assets of the company.

Michael Johnson, the CEO of Herbalife, was accused by investor Bill Ackman of running pyramid and Ponzi scheme and defrauding people out of $3.8 billion. Ackman claims that 1.9 million Herbalife salespeople have not made money since the company was founded 32 years ago, and each person would have paid about $2,000 for supplies and training. Ackman claims that Herbalife makes most of its money not by selling products but by recruiting sales staff, which pay a sign-on fee. Johnson responded to the accusations by stating, “This is a ridiculous assertion by people who are trying to manipulate our stock.”

Jeffrey Kelly, 44, of Ohio, was arrested in connection with charges that he took more than $1.5 million from about 15 people in a Ponzi scheme that he ran through his insurance and investment company J.G. Kelly Financial Group. Kelly solicited clients to invest in funds called Superior Financial Resources and J.G. Kelly Equities Group. Kelly was arrested while he was working as a boat captain at Disney World

Michael E. Kelly, 63, suffering from colon cancer, was ordered freed from custody just one day after he pleaded guilty to one charge relating to a massive Ponzi scheme that scammed mostly elderly investors out of $342 million by promising safe, high returns from timeshares in Mexico. Kelly had been serving time since 2006 and was sentenced to time already served. Kelly faces a far lengthier prison term if he survives and is convicted on any of the 13 remaining counts.

Linda Kennedy of California, the former president of 21st Century Financial in Paso Robles, was sentenced to 5 years in prison and ordered to pay restitution after pleading guilty to charges in connection with her operation of a Ponzi scheme.

Stephen J. Klos, 86, saw his sentencing continued. Klos accepted a plea deal in connection with his $3.5 million Ponzi scheme that defrauded 10 elderly victims in the Seattle area. Klos agreed to a sentence for one year in jail and $2.3 million in restitution. Klos faces a sentence range of 51 to 68 months if the judge declines to accept the plea and imposes his own sanctions, or if Klos has failed to repay the victims of his Ponzi scheme $2.3 million as he promised in July.

Jason T. Knapp, 29, was charged with running a Ponzi scheme through his company SteepleChase Group, by promising returns of 18 to 20 percent for short-term investments. Knapp worked as a financial advisor for Dawson James Securities Inc. and solicited his clients to invest in his scheme.

The Fifth Circuit denied the motion of Gilbert Lopez and Mark Kuhrt for release pending sentencing. They were convicted on November 19, 2012 of conspiracy and wire fraud for their roles in Allen Stanford’s multi-billion-dollar Ponzi scheme. United States v. Lopez, 2012 U.S. App. LEXIS 26292 (5th Cir. Dec. 21, 2012).

Peter Madoff, 67, the brother of Bernard Madoff, was sentenced to 10 years in prison and ordered to forfeit $143.1 billion for his role in the Madoff Ponzi scheme. Peter Madoff pleaded guilty to charges for falsifying books and records and agreed not to oppose a request by prosecutors for a maximum sentence of 10 years. Peter Madoff helped create false and misleading documents designed to make it appear that the firm had an effective compliance program. He also transferred millions of dollars within the Madoff family to avoid tax payments to the Internal Revenue Service and put his wife on the firm’s payroll.

Mary Ann McCall was arrested for defrauding Ponzi schemer James Koenig. McCall met Koenig though match.com in 2007and then advised him that she had breast cancer. She moved into Koenig’s house and never paid for it. Koenig was arrested and jailed for defrauding hundreds of investors out of millions of dollars. The original indictment alleged more than 700 victims with about $250 million in damages. Koenig’s assets were frozen in connection with his scheme, and the house is now in foreclosure.

Marc Perlman of California saw a default judgment and permanent injunction entered against him and his firm, iGlobal Strategic Management LLC, in connection with the operation of a commodity pool Ponzi scheme that defrauded 17 people of at least $670,000. According to the CFTC, Perlman, who is deaf himself, solicited funds mostly from the deaf community. At least $365,000 of iGlobal investor funds were misappropriated to make payments of fictitious profits, for cash withdrawals and personal expenses including electronics, groceries, restaurants, and to pay utility bills and rent at Perlman’s personal residence.

Edward Shannon Polen, 37, pleaded guilty to running a $16 million Ponzi scheme. Polen admitted that, between January 2007 and March 2011, he operated three investment Ponzi schemes in which he solicited and received approximately $16 million from more than 50 investors. Polen admitted that the investment schemes, identified individually as the “John Deere Investment,” the “Greenway Investment,” and the “Tennesseein Valley Authority Coal Ash Cleanup Investment,” were totally fraudulent, and he never intended to invest any of the funds he received from investors.

Robert Schnepp, 51, former high school basketball coach in Florida, was arrested in connection with an alleged Ponzi scheme that defrauded investors of about $200,000. Schnepp told friends, teachers and fellow coaches that he was an investment adviser and began soliciting money from them. Schnepp sent out fake quarterly statements indicating the investments were doing well. Schnepp was not a licenses investment adviser during that time period.

Feisal Sharif of Connecticut was charged by the CFTC with operating a commodity pool Ponzi scheme named First Financial that solicited approximately $5.4 million from at least 50 people. Sharif enticed investors by guarantying monthly and yearly returns of one to ten percent on their investments. To falsely assure pool participants that their funds were safe in the pool’s trading accounts, Sharif allegedly fabricated trading account statements from First Financial and from futures commission merchants.

Martin Sigillito, 63, was sentenced to 40 years in connection with his Ponzi scheme which defrauded more than 150 investors out of $52.5million. Sigillito, a lawyer and American Anglican bishop, told investors that their money was going to real estate investments in the United Kingdom through a program known as the British Lending Program, that there was little or no risk, and they would earn high rates of return. Sigillito ran the scheme with James Scott Brown, who previously received a 3 year sentence.

Vincent Singh, 43, was ordered to remain in jail pending a pre-trial hearing in January in connection with an alleged $20 million Ponzi scheme that defrauded around 190 victims. Singh allegedly operated the scheme through his business, Perfect Financial Group, which supposedly made hard money loans. According to federal authorities, Singh represents a flight risk and has already been charged with obstruction of justice, so there was not sufficient reason to release him.

Rick D. Snow was sentenced to 10 years in prison for his role in the Fair Finance Ponzi scheme. Co-defendants Timothy Durham and James Cochran were sentenced to 50 and 25 years, respectively.

David L. Spector, 52, was sentenced to 5 years of probation and ordered to pay more than $600,000 in restitution in connection with charges relating to mortgage fraud and a Ponzi scheme. Spector would conduct real estate mortgage refinance closings but would transfer the proceeds of the mortgages obtained by his clients in a Ponzi scheme fashion.

Trigon Group, Inc. and Darren L. Palmer were permanently enjoined in an action by the CFTC and ordered to return $20.6 million in ill-gotten gains in connection with a commodity pool Ponzi scheme. The consent order states that the defendants solicited at least $40 million from at least 57 investors.

Darrell Underwood and Cynthia Underwood lost their motion to overturn 2009 convictions for their role in a Ponzi scheme. “Darrell Underwood, aided and assisted by Cynthia Underwood, solicited investors for a real estate venture, convincing investors to invest in Walkwood Properties by telling them the company would invest the money in properties subject to foreclosure. Petitioners promised investors a 50 percent return on the investment within a 60-to-120 day period. Throughout 2007 and into early 2008, investors received payments, leading them to believe the housing transactions were generating the promised returns on the investments. Evidence introduced at trial, however, established Petitioners were using investors’ funds to pay other investors and for Petitioners’ own enrichment.” Underwood v. United States, 2012 U.S. Dist. LEXIS 173514 (E.D. Va. Dec 6, 2012)

Kaveh Vahedi, 51, pleaded guilty to charges related to his $12 million Ponzi scheme that he ran through his company KGV Investments in which he defrauded 30 investors.

INTERNATIONAL PONZI SCHEME NEWS

British Columbia

Rashida Samji, alleged perpetrator of a large Ponzi scheme, filed bankruptcy in the face of 58 lawsuits by investors against her, her alleged accomplice, Arvin Patel, and their companies, Worldsource Financial Management Inc. and Coast Capital. It has been alleged that Samji raised $83 million from 218 investors for what she purported to be a “secure investment” in a winery that would yield six to 30 per cent annually. Many of the defrauded investors are from the Surrey Indo-Canadian community. Some of the lawsuits also name three financial institutions through which Samji allegedly funneled money from her scheme - TD Bank, Royal Bank and Vancity Savings Credit Union.

China

A report was issued by Sin Chew Daily cautioning investors about investing in Nanning-Asean Economic Development Zone, which might be a Ponzi scheme. The report said that investors were asked to invest 69,800 yuan (RM35,000) and then told that they would be able to receive returns of about RM5.2mil within three years.

An investor protest took place at a branch of Huaxia Bank in Shanghai over products that the investors claim have not paid out as promised. Investors who had invested funds in a wealth management product (WMP) issued by Zhongding Wealth Investment Centre, sold at Huaxia Bank, have lost their savings. Forty investors protested against Huaxia Bank in Shanghai after they learned that Zhongding would be defaulting on its repayment to them. Zhongding had offered 11 percent interest which was more than triple the benchmark deposit rate set by the central bank. The products were structured as limited partnership interests that provided private equity stakes in auto companies and pawn shops. Huaxia Bank says that it is not a distributor of this product and that any sales person who sold it did so without bank authorization. This type of “wealth management” product is unregulated in China, causing concerns that there may be systemic problem in the country’s entire financial system.

New Zealand

The order freezing the assets of David Ross and his company, Ross Asset Management, will continue until February. Ross in the meantime is receiving $1,000 per week to live on. Ross Asset Management was placed in receivership in November. The receivers of Ross Asset Management, a Wellington fund manager, also applied to the High Court to liquidate the companies. The receivers thus far have identified $10.2 million of the $449.6 million that was believed to be managed by Ross for 900 investors.

Christopher John Collecutt, 57, was sentenced to 2 years, 2 months and 3 weeks’ imprisonment in connection with his Ponzi-style scheme that he ran as a self-employed foreign exchange trader. Collecutt traded from home under the name CFX Trading, and defrauded 59 investors out of about $1.5 million.

Taiwan

A 52 year old woman surnamed Huang was sentenced to 12 years in prison in connection with a NT$20 billion Ponzi scheme where she embezzled tuition fees paid for a spiritual workshop she founded. Huang’s sister and husband, each surnamed Lin, each got a 10 year sentence. Huang would promise NT$80,000 in interest payments every 8 months for every NT$1million that victims deposited. Huang collected over NT $19.9 billion from 8,056 people. The money was in luxury real estate.

NEWSWORTHY LEGAL ISSUES IN PENDING PONZI SCHEME CASES

A murder plot was revealed in connection with the Ponzi scheme of Jason “Bo” Beckman. Federal prosecutors said that Gerald Durand proposed to Christopher Pettengill, two co-conspirators in the Ponzi scheme with Beckman, that they arrange to kill Beckman to collect and split the proceeds of his $2.5 million life insurance policy.

The receiver of Benny Judah filed his final report disclosing that $10.3 million will be distributed to investor victims who have combined losses of $35.9 million. Judah is serving a 25 year sentence after pleading guilty to charges in connection with his Ponzi scheme in which he knowingly sold and delivered unregistered securities.

The Bernard Madoff trustee, Irving Picard, asked the court to block an $80 million settlement with the founders of Fairfield Greenwich Group. Picard said that that settlement, if allowed to proceed, will “thwart the Trustee’s efforts to recover funds for equitable distribution to the victims of the Ponzi scheme.” Picard separately entered into a settlement with the funds where they will receive distributions on $270 million in approved claims. If the $80 million settlement succeeds, then these investors will receive more than others who invested directly or indirectly with Madoff. Picard has estimated as much as $7 billion was invested by various Fairfield funds with Madoff, including investments by the Sentry funds. The settling defendants include Fairfield Greenwich’s founder partners, Walter Noel Jr., Andres Piedrahita and Jeffrey Tucker, who will cover the bulk of the settlement.

Bernie Madoff investors Adele Fox and Susan Marshall argued before the Second Circuit that an injunction issued against them prohibiting them from pursuing claims against the estate of Jeffry Picower should be overturned. Picower’s estate entered into a settlement with the Madoff trustee and the government providing for payment of $7.2 billion. About $5 billion of the settlement is to be paid to the estate of Bernard L. Madoff Investment Securities LLC, and $2.2 billion was to be forfeited the government. Picard has recovered $9.28 billion for Madoff victims, excluding the $2.2 billion in the government forfeiture, and about $2.89 billion has been distributed.

The family of Shimon Levy, an investor and business partner of Scott Rothstein, settled a lawsuit with the Rothstein Rosenfeldt Adler bankruptcy estate for $150,000. The Levys had been sued for recovery of $4.8 million of payments that had received from Rothstein. The Levys had invested approximately $50.6 million in the Ponzi scheme and were repaid approximately $49 million. The settlement involves the payment of $150,000 and a lower priority treatment for the Levys’ $5.6 million claim. The Trustee was satisfied with the Levy’s claims that the Rothstein transactions were made in “good faith.”

The receiver of Small Business Capital Corp. reported fees, along with his attorney, of about $377,000. The scheme involved 400 investors that had invested $42 million into funds managed by SB Capital. The CEO of SB Capital, Mark Feathers, denies charges of fraud. The receiver reported that investors might recoup $11 million in liquid assets and $25.45 million from loans.

An accord was reached between the receiver of the R. Allen Stanford estate and the Stanford Antiguan liquidators to jointly control the remaining assets, coordinate victim claims, and to cooperate on asset recovery and information sharing.

The SEC commenced proceedings against the Chinese arms of five top accounting firms - Deloitte, KPMG, PricewaterhouseCoopers, BDO and Ernst & Young – in connection with a probe of possible accounting fraud of nine U.S.-listed Chinese companies. The SEC has been attempting to obtain documents relating to possible accounting irregularities at those firms, but Chinese secrecy laws have stymied those efforts. Although the SEC has been in discussions with Chinese regulators on cross-border cooperation, including access to documents, those efforts have not yielded an agreement. The SEC action accuses the affiliates of violating U.S. securities laws that require foreign public accounting firms to provide the SEC with audit work papers involving any company trading on U.S. markets. Many of the Chinese companies under investigation traded on U.S. exchanges through “reverse mergers” and have since been deregistered by the SEC.

The receiver of ZeekRewards is battling with investors over the service of subpoenas by regular mail rather than by personal service. Additionally, counsel for victim Fun Club USA, Michael Quilling, has filed a motion seeking the appointment of himself as an examiner that would act as a representative on behalf of all “affiliates.”

The former lawyer for Bernard Madoff, Lee Sorkin, on behalf of Trudy Gilmond and Kellie King, filed a motion to terminate the receivership of ZeekRewards, taking issue with the SEC’s determination that ZeekRewards business involved the sale of securities Gilmond and King are currently being pursued by the receiver for the return of false profits.

The ZeekRewards receiver provided updates to victims on the $600 million Ponzi scheme case. The receiver estimated that approximately 840,000 affiliates invested more than they withdrew, but about 77,000 affiliates withdrew an amount in excess of their total investment. The receiver is preparing to institute a claims process and is in discussions with many net winners regarding the repayment of profits. The receiver may institute litigation to recover clawbacks. The receiver is also continues to oppose the appointment of an examiner along with efforts to terminate the receivership.

Kathy Bazoian Phelps

Ponzi-Proof Your Investments

An Investor's Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams

Kathy has significant experience with the issues arising in Ponzi scheme cases, and in tracing and recovering assets in complex fraud cases. She has represented all types of parties in Ponzi scheme cases, including investors, defendants in litigation, trustees, and receivers. She has extensive litigation experience in a wide variety of bankruptcy litigation matters, representing operating and liquidating trustees, debtors, and secured and unsecured creditors. Kathy also serves as a mediator in bankruptcy matters, in other complex disputes, and in other matters requiring an expert on fraud or Ponzi schemes.

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